Most Federal Reserve policymakers this month worried that inflation risks had “ticked up” recently, with some fretting that price increases were already at the upper end of their comfort zone and could hurt the economy.
“While recent monthly readings indicated that core inflation had been subdued, a number of participants noted that underlying core inflation appeared to be running at a pace around the upper end of the range they viewed as consistent with price stability,” according to minutes from the central bank’s Federal Open Market Committee meeting Aug. 9, which were issued Tuesday.
“Participants commented that an increase in inflation from recent rates could have especially adverse effects on longer-run economic performance,” the Fed said.
But the Fed also said lofty energy costs were likely to be a “significant drag” on consumer spending, and it thought that household spending would advance at a moderate pace.
Markets viewed the Fed comments through the prism of the recent rise in crude oil futures after Hurricane Katrina and focused on concerns about the effect of high energy prices. Instead of taking Fed concerns about inflation to signal further interest rate rises, some observers say the storm, which disrupted energy production on the Gulf Coast, may force the Fed to rethink its policy.
“Overall, they were a bit concerned about inflation and see strong growth, which supports the notion that they will continue to tighten policy. But after Katrina, all bets on how much they might tighten are off the table,” said Michael Englund, chief economist at Action Economics in Boulder, Colo.
The minutes said Fed participants discussed factors affecting costs and prices “at length” at their meeting three weeks ago.
Many members believed that inflation would be kept in check with a policy of steady rate increases, combined with global business competition and the difficulty companies faced in raising prices.
At its August meeting, the Fed lifted a key interest rate a quarter percentage point to 3.5%, the 10th straight quarter-point rise.